Jun 29, 2020
Find Out If You Should Lease Or Finance Your Next Car
Lease vs finance – which is the best option? This is the question everyone is faced with when it comes time to shop for a new ride. Of course, depending on who you talk to, you’ll get a completely different opinion on which option is best and why.
There are people who have always bought and financed cars and always will. There are people who have always leased and always will. Then there are those who will buy or lease depending on the market conditions and whichever option at the time offers the best financial advantage.
So, which is the best choice? There really is no clear cut answer, and it comes down to your specific driving needs and financial situation. In this blog we’ll compare leasing vs financing. We will compare both options, look at the pros and cons, and answer common questions about leasing and financing cars.
What Is A Car Lease And How Does It Work?
A car lease is similar to a rental agreement. A lease allows you to drive a new vehicle for a specified period of time. A lease typically lasts anywhere from 2 to 5 years. With a lease, you are paying to use the vehicle. You are only paying for the vehicle value that you use during the lease. Once the lease is up, you return it. You have the option to buy the vehicle outright if you so choose.
Leases can come in many types. There are standard leases, lease to own, and lease takeovers.
One key distinction with leases is there are some restrictions. You are subject to a kilometer restriction, there are early termination fees, and you may be required to pay for excessive wear and tear when retiring the vehicle.
What Is Vehicle Financing?
When you finance a vehicle, you are borrowing money from a financial lender. When you finance an auto loan, you have entered an agreement to make monthly payments. You will pay more per month compared to a lease. Once the loan is paid, you will own the vehicle.
Auto dealers have relationships with a number of lenders. You can choose one of their lending partners, or get financing on your own.
It Is Better To Lease Or Finance A Car?
Before you can make a determination about leasing or finance, you need to understand your driving needs and habits and, more importantly, which option makes the most financial sense.
Ask yourself :
- How much of a monthly payment can I afford?
- What is more important – the monthly payment or total cost of the vehicle?
- How will I pay for the car – cash on hand? Financing? Line of credit?
- Do I plan to make a down payment?
- Do I want/need a new car every few years?
- Do I want something to trade in on my next vehicle?
Even though choosing a car can be a very emotional decision, you need to make rational decision, especially when it comes to the financials.
Lease Vs Finance A Car Considerations
Once you’ve figured out what you can afford, you need to consider the vehicle features you want/need and how you will use the vehicle.
- How long would you like to keep your car?
- How many kilometers do you drive annually?
- Do you take care of your car and maintain it regularly?
- Do you want to customize your vehicle?
- Is it important for you to have equity in your car?
What’s The Difference Between Leasing Vs Financing?
The key difference between leasing and financing is vehicle ownership. At the end of a financing agreement, you will own the vehicle. With a lease, you will not own the car. With financing, every payment you make goes toward paying off your car loan. Once the loan is paid off you have 100% equity in the vehicle.
IS It More Affordable To Finance Vs Lease A Car?
The overall car cost of leasing versus financing can change based on the term. In the short term, with all things the same (term, car price, interest rate, down payment) a monthly lease payment will be more than 30% less than a monthly finance payment.
However, as the length of the term gets longer, things begin to balance out. Monthly payments can be fairly even for medium term agreements. In the long term, financing can actually be cheaper than leasing. Consider all financial factors, terms, and options to find out which option is the cheapest and meets your financial needs.
Compare your cost options by using this Government of Canada vehicle lease or buy calculator.
When Is It Best To Lease A Car?
Car ownership costs can quickly add up and drivers continually search for ways to reduce those costs. For some people, leasing is one significant way to reduce the monthly cost of operating a car. According to Forbes 1 in 4 people make the choice to lease a car over buying a car?
Studies show that people who lease are as satisfied as those who finance a car purchase. 66% of people who lease a car were very satisfied compared with 69% who were very satisfied with financing or buying a car.
When you lease a car, you are entering an agreement with a leasing company that gives you the right to drive the vehicle of your choice. Leasing is similar to a long-term rental. Your payments don’t build equity like a car loan and payments do.
When you lease, you can still negotiate terms of the deal such as the length of the lease, your monthly payment, the rate of interest, amount of kilometers you can drive for the duration of the lease (known as wear and tear) and a buyout price (residual value) at the end of the lease – in the event that you decide to buy the car.
Reasons Leasing Is A Good Option
- You Want To Drive A New Vehicle : Leasing makes it more affordable to drive a new car. Lower monthly payments allow drivers to drive a car that they may not be able to drive if they had to buy or finance it.
- You Like Getting A New Car Every Couple Of Years : If you like driving a car with the latest features and technology, leasing is a great way to get a new car every 2-4 years.
- You Want Lower Monthly Payments : Many people need to watch their bottom line and keep monthly expenses as low as possible. Leasing allows people to drive a new car for less than financing a new car.
- You Don’t Put A Lot Of Kilometers On The Car : If you don’t drive a lot, you don’t have to worry about kilometer limits on a lease.
When Does It Make Sense To Buy Or Finance A New Car?
Owning gives drivers much more flexibility with how they use their car and what they do to it. Buying a car allows you to make modifications, drive it as you please and you can also use it as an asset.
If you have the resources, you can pay with cash – an option that gives you good negotiation power. However, most people take out a car loan. You can secure a loan through the car dealership you are working with, but you can also get a loan with your bank, a lending company or even use a personal line of credit. So you have options.
When purchasing a vehicle using a loan, your lender is the one who owns the car until you finish paying off your car loan. You can negotiate the term of the loan, the interest rate and the monthly payment with your financer.
Reasons Buying Or Financing A Car Is A Good Option
- You Drive A Lot : When you own your car, you don’t need to worry about the distance you drive. With a lease, there are mileage limits and financial penalties if you exceed them.
- You Plan To Keep The Vehicle For A Long Time : Once you pay off your car loan – which is often a 48- to 60-month term, you own the car. It’s an asset you can use toward trade in value on another new car or continue to drive payment free.
- You Want to Customize Your Car : Some people just like to add extra features to their cars – like specialty tires. If you lease a vehicle, you have to remove any modifications or customizations you make to the car.
What Are The Pros And Cons Of Financing Vs Leasing A Car?
Here are some major comparison points to considering when weighing the pros and cons of leasing vs. financing a car :
- Financing : When you buy a car with a loan – you fully own the car at the end of the loan agreement.
- Leasing : You do not own the car. You only have the right to drive the car. At the end of the lease agreement, you return the car to the leasing company. You also have the option to buy the car for the residual value stated in the contract.
- Financing : You put as many kilometres on your car as you need to. Remember – higher kilometres means lower resale value.
- Leasing : You agree to a limit of kilometres for the duration of the lease. If you exceed the limit, you will pay a per kilometer fee for overages.
Excessive Wear And Tear
- Financing : You don’t have to worry about wear and tear on your car – except that excessive wear and tear will devalue your car.
- Leasing : You will pay extra fees if your car shows signs of excessive wear and tear.
Car Modifications Or Customizations
- Financing : You can make any modifications or customizations. You own the car!
- Leasing : You can modify the car, but before you return it, you may have to change the car back to its original state.
Ending The Agreement Early
- Financing : You can sell your car or trade it in whenever you want or need to. You will still need to pay off outstanding loan amount, though.
- Leasing : In most cases, you will be charged a fee for breaking the lease before the end of the term. The costs can be as high as paying out your monthly payments.
Returning The Vehicle
- Financing : You are responsible for selling or trading in your car.
- Leasing : You bring your car back to the leasing company. You may have to pay some end-of-lease costs.
Does Leasing Or Buying A Vehicle Affect Insurance?
Your decision to lease or finance does not have a direct impact on your Ontario car insurance cost. However, when leasing, you will need to meet the leasing company insurance requirements.
Since your leasing company still owns the vehicle you will need to have certain coverage in place to protect the vehicle. Leasing companies will require you to have comprehensive insurance and collision insurance coverage.
Lease Or Finance FAQs
Still not sure whether leasing or financing is the best option for you? Consider these common questions about leasing vs financing :
There are advantages and disadvantages to both options. It depends on your financial situation, market conditions and personal preference. Leasing can be a better option if you prefer to have new vehicle every few years and you want to have lower monthly payments.
It depends. For many drivers, leasing does not make financial sense because you don’t get anything in return once your lease is up. You have to return the vehicle. But, if you are fine with turning in your lease for a new lease, it may be worth it to you.
When leasing to own the car you will eventually own the vehicle like when you finance. The main difference is the vehicle owner (dealership) will hold onto the vehicle title when you lease to own until it’s paid off. When you finance, the title is transferred over right away.
Financing a used car is an effective way to purchase a more affordable vehicle. Most people only lease when they buy a used car if they have low or bad credit. It’s a way to get a vehicle when you have less than ideal finances.
Car leases are typically available for a minimum of two years. However, some dealers may offer a one year lease, but it is not common.
In a finance lease, ownership is transferred to the lessee at the end of the lease term. In an operating lease, ownership is retained by the lessor during the term.
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